In his Budget speech, finance minister Arun Jaitley devoted an entire section to the ease of doing business in India and proposed a number of reforms that could improve India’s rankings in the World Bank’s annual Doing Business report.
Lately, the government has been proactive in streamlining the regulatory aspects of doing business in India and aims to be in the top 50 ranked countries from its current rank of 130 out of 190 countries. The urgency is such that ministries responsible for each of the ten parameters on which the World Bank ranks a country’s business environment are holding weekly meetings to rapidly implement reforms.
The enthusiasm to chase better rankings was evident from former law minister D.V. Sadananda Gowda’s response to a Lok Sabha discussion on the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015 where he said, “Today everybody spoke about ease of doing business and we all know what the ranking of our country is. But nothing has been done to take it forward. So, this is an attempt to take our country forward so that our ranking goes up in the Ease of Doing Business index of the world. This Bill has been brought only with that aim in mind.”
On the very next day, the Lok Sabha passed the Arbitration and Conciliation (Amendment) Bill, 2015 where again Gowda said, “Ease of Doing Business and ranking in the World Bank should be geared up and India should be a centre for international arbitration hub. Practically we have to encourage the ADR (Alternate Dispute Resolution) mechanism for settlement of disputes. In order to improve the World Bank ranking also we should do it. To encourage investors and to make our country an investor friendly country, certainly we should take up such initiatives wherein they should feel that they can invest in India.”
Barring a few, most members of parliament supported the bills and congratulated the government for improving the regulatory environment for businesses. MPs who opposed the Bill raised objections that related to the manner in which the Bills were introduced in parliament; how they were designed only to benefit the rich and do nothing to improve judicial access for the poor. What is striking is that not one member raised questions about the limitations of the claims made by the World Bank’s Doing Business report, its ranking procedure or the several disclaimers that it offers while putting forward its results. Both the Indian media and policy makers seem to have accepted the findings and recommendations of the report, now in its fourteenth year, without even a whimper of nuanced discourse about the report itself.
What is the World Bank Doing Business report?
The Doing Business ranking evaluates ten aspects of business regulation for small and medium sized firms located in the largest city in each country based on standardised case scenarios. These parameters are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
Doing Business relies on four main sources of information: the relevant laws and regulations, local law firms and other private sector respondents, the governments of the economies covered and the World Bank group regional staff.
The report then uses a simple averaging approach for weighting component indicators, calculating rankings and determining the distance to frontier score.
Criticism of the report
The problem with the Doing Business report is that its rankings and recommendations are widely discussed and disseminated by policy makers and the media, but the assumptions and the limitations of the report do not receive adequate attention. As a result, instead of using the report as a starting point for further study of the regulatory environment in each country, we end up focusing excessively only on the parameters that the report studies, leaving aside other indicators that may have an important role for an individual country’s stage of development.
The criticism of the report’s impact on regulations worldwide has been such that a panel of independent experts, that included former Planning Commission member, Arun Maira, was set-up by the World Bank to review it. The panel made several observations that are worth recounting here to contextualise the discussions that may take place around the Ease of Doing Business reforms in the second half of the budget session in March.
Causality between regulation and development outcomes is difficult to establish due to multiple factors that influence those outcomes: empirical evidence on the results of business-regulation reforms captured by the report is mixed and suggestive at best. Correlations between the report’s topics and developmental outcomes do not justify a causal interpretation. Thus, pithy headings such as ‘Simplify and deregulate in competitive markets’ or ‘Reduce court involvement in business matters’ can be problematic.
The reliability of the narrow information source that the report relies on: the report relies on local law firms to provide answers to very specific scenarios. Researchers have argued that due to the considerable difference between the stylised questionnaire and the actual legal scenario, the answers given by the respondents may not be very accurate.
Indices mask the relative importance of different factors measured by the report: several grassroots studies in India have revealed that small and medium enterprises struggle to obtain credit even though India is ranked 44 on the getting credit indicator. With overall ranking as 130 in the 2017 report, the government may choose to focus on other indicators than improving credit access which may be a real issue.
The businesses captured by the report may not be representative of all businesses in the country: the report only measures regulations applicable to categories of business that can be captured through its methodology. The report does not indicate how far its conclusions extend to firms outside its frame of reference.
Finally, the fact that several international aid agencies, investment organisations, foreign governments, media and the World Bank itself use Doing Business ranking as a benchmark for the performance of countries, puts a lot of pressure on developing countries to usher in reform processes that may not be most suitable for their individual context.
In India, both the government and parliament have focused on these rankings at the cost of several other solutions that could improve India’s business environment. For instance, corruption is a key driver of business costs and delays. The Doing Business approach would encourage deregulation to remove bottlenecks and opportunities for bribes to be demanded.
However, such an end could also be achieved by other ways, which include, as Kasuhik Basu ingeniously suggests, making a simple change in the Prevention of Corruption Act. Currently, bribe taking and bribe giving are equally wrong. This gives the bribe giver and bribe taker an incentive to collude or not report each other as their interests align. Making bribe-giving legal while keeping bribe-taking a punishable offence could change this scenario. However, there is little or no discourse around measures that could improve the lives of citizens and improve business environment at the same time.
We must value the Doing Business reports and rankings as a starting point for a discussion around creating a healthy business eco-system, while keeping their limitations in mind.
Prateek Sibal studies Economics and Public Policy at Sciences Po, Paris and was a LAMP Fellow 2015-16 at PRS Legislative Research